StreetAuthority Articles

This 'Dividend Vault' Stock Could Help Your Portfolio Survive A Sell-Off

David Goodboy — Thu, 23 May 2013 09:00:00 -0500

As you probably know, we are in the midst of one of the greatest bull markets of all time.

Fueled by an unfettered fiscal-easing policy with central-bank assurances that pro-growth intervention will continue until the economy is back on track, stocks are roaring higher. The Dow Jones industrial average has jumped nearly 2,500 points since the start of 2013, breaking all-time records along the way.

The first half of 2013 has been a stock investor's dream come true. In fact, it's nearly too good to be true.

There has not been a significant pullback in prices this year. Every time a sell-off begins, it is met with aggressive buying pressure, pushing shares higher day after day.

This nonstop bullish move higher is unusual. It has resulted in many investors becoming complacent and forgetting that strong upward periods are always eventually met with powerful downward moves. Stocks cannot climb higher forever. Smart investors are prepared to weather the inevitable downside that may be coming soon by investing in solid, dividend-producing companies for the long term.

Studies indicate that fully 40% of the stock market's total returns over the past 80 years are due to dividends. In addition, dividends provide a cushion against the everyday roller-coaster ride of the stock market.

When stocks are surging higher, it's easy to forget about the power of dividends and concentrate strictly on growth. This can be huge mistake, particularly when the inevitable bearish period begins.

How Can You Protect Yourself From The Inevitable Bearish Selling?
Building a portfolio of "Dividend Vault" stocks is a proven method of surviving the potential sell-off. These stocks are part of a group of U.S. companies sitting on $1.7 trillion of cash that can be paid out as dividends. Last year, a record amount of dividends was paid out. This trend is continuing, with 2013 shaping up to beat the 2012 record.

I recently learned from Elliott Gue's Dividend Opportunities newsletter of a Dividend Vault stock with an amazing long-term record. This company has returned nearly 9% since January, and Oppenheimer's analysts think the stock can soar 26% by the end of the year.

This company's edge consists of being one of the largest petroleum refiners in the United States, processing more than 440,000 barrels per day. The huge volume gives it the massive purchasing power to buy at below-average prices and then sell at a significant profit.

If you haven't already guessed it, I am talking about refiner HollyFrontier (NYSE: HFC). Riding the wave of the U.S. oil revival, HollyFrontier has built up an astounding $1.8 billion in its Dividend Vault.

In 2012, the company paid four special dividends totaling $2 per share, along with its regular quarterly dividend. The firm declared another special dividend on May 16 of 50 cents a share. This is more than the regular dividend of 30 cents a share, payable on June 12 and July 13. These payments annualize to approximately $1.20 per share, pushing the yield to about 2.5%.

Dividend Vault companies like these will be the first line of defense when the bear market starts. Technically, HFC shares have built a base at the $47 level and have started to bounce higher, creating a solid buying opportunity.

Risks to Consider: This company's future is built upon the continued revival of the U.S. oil business. Should oil prices drop, HollyFrontier would probably suffer along with the commodity.

Action to Take --> I like this dividend-paying dynamo right now with a 12-month target of $59. Entering now with initial stops at the support level of $45 makes sense. Dividend Vault companies such as HollyFrontier will be the first line of defense if this bull market turns bearish.

-- David Goodboy

P.S. -- Stocks like HollyFrontier are part of a group of companies sitting on a $1.7 trillion "Dividend Vault." Simply put, the "Dividend Vault" is the easiest way we know to collect thousands of dollars in dividends each month for the rest of your life. To learn more, click here.

David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Goodboy
This 'Dividend Vault' Stock Could Help Your Portfolio Survive A Sell-Off

Are You Misusing This Powerful Strategy?

David Goodboy — Wed, 22 May 2013 13:30:00 -0500

Every stock investor has heard about the importance of diversification.

In fact, I have emphasized many times in my articles just how critical being properly diversified is when managing a successful long-term portfolio. Diversification is not just critical for a long-term portfolio -- it is the primary key for survival in the stock market.

Massive bull markets, like the one taking place now, can have the negative effect of causing investors to become complacent, take too many risks, and not diversify correctly.

I know from experience that it is difficult not to go "all-in" on a hot stock. During the dot-com boom of the late 1990s, one Internet stock in particular just seemed to be going up day after day.

Noticing the uptrend, I decided to liquidate my portfolio and go all-in with this stock. Ignoring everything I knew about diversification, I used all of my capital and leverage, purchasing a large number of the outstanding shares.

As you may expect, Murphy's law was in full force, and the bad news hit the newswire on my second day of ownership. The stock that had climbed day after day, week after week and month after month suddenly took a nosedive. By the time I could dump the shares, I had lost about a quarter of the hard-earned money in my account.

Had I remained diversified and only purchased a sensible number of shares, the damage to my meager account would have been much less.

Despite hearing about it all the time, many investors don't know what diversification is or how to properly diversify a portfolio. Let's begin with a definition.

"Diversification is a method of portfolio management whereby an investor reduces the volatility (and thus risk) of his or her portfolio by holding a variety of different investments that have low correlations with each other," according to InvestingAnswers.

Remember, smart investing is a trade-off between risk and return. It isn't an all-in gamble on a single stock. Think of diversification of a way of spreading risk.

Diversification is a personal choice based your needs, goals and time frame. My personal rule of thumb is to offset or hedge each risky position with something considered more stable, if less profitable.

Clearly, this 1-to-1 level of hedging isn't for everyone. I don't always stick to the rule, but it provides a basic framework for building a diversified portfolio.

With this in mind, here are four guidelines for diversification.

1. Diversify Between Asset Classes
Asset classes are different types of investments.

Exchange-traded funds (ETFs) allow investors to diversify across asset classes without having to step outside of a regular stock brokerage account.

The primary asset classes include equities, bonds, commodities, currencies and real estate. Building a portfolio that comprises each of these is one way to diversify. For example, if you are concerned about structural risk, rather than purchasing real-estate investment trusts (REITs) through your brokerage account, you could purchase actual investment property.

The same goes for precious metals and other investments. If you are worried about the integrity of the stock market or individual brokerages, buying the physical counterpart makes good sense as a diversification tool.

2. Diversify Across Securities Within Each Asset Class
This means to invest in mutual funds, ETFs, managed funds and individual equities within each of the primary asset classes.

An example would be to own SPDR Gold Trust Shares (NYSE: GLD), a mining company ETF, as well as a gold-based mutual fund. As stated above, hard-core diversification would include the physical metal, as well.

3. Diversify Across Fund Families And Money Managers
This strategy mitigates management risk.

In today's environment, the risk of internal fraud, negligence or mismanagement runs high. This is why investing into several different fund families and money managers will help prevent you from being wiped out should one of the management companies have unexpected financial problems.

Bear in mind that this does not protect you from a structural breakdown of the financial marketplace. If this occurs, we will all have greater worries than our stock portfolios. That said, physical assets such as real estate and precious metals could mitigate losses in true economic disaster-type situations.

4. Diversify Across Time
This is one of the most powerful yet least understood methods of diversification. Buying into a stock across time rather than all at once is a smart move in most market conditions.

The one time it doesn't make sense is during times like now, when a roaring bull market would create larger returns if all the capital had been invested all at once rather than over time.

But unfortunately, the good times are only observable in hindsight. Therefore, "woulda, coulda, shoulda" reasoning does not negate the importance of diversifying across time with your investment purchases.

No one can time the market exactly. Investing on a regular basis, rather than all at once, can result in larger and safer returns.

Risks to Consider: Proper diversification mitigates risk rather than increasing it. Obviously, spreading out risk will lessen your portfolio's upside, but the benefits far outweigh the possible gains over time.

Action to Take --> The first step is to review your portfolio to assure that it is properly diversified for your needs. Using the ideas above is a good way to start.

-- David Goodboy

P.S. -- StreetAuthority's Amy Calistri has one objective for readers of Stock of the Month... to provide one quality stock pick each month, with in-depth analysis in plain English that investors can understand. In fact, she just released a special presentation, "How to Beat the Stock Market... In Just 12 Minutes per Month," that tells you more about her strategy. Go here to learn more.

David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Goodboy
Are You Misusing This Powerful Strategy?

These High-Yield Funds Make A Great Investment Even Better

David Sterman — Wed, 22 May 2013 12:00:00 -0500

Our team of analysts here at StreetAuthority endeavors to spot value wherever it may lurk, but we're partial to a few solid investment angles.

One of our favorites: business development companies (BDCs), which we have written about on numerous occasions. My colleague Andy Obermueller recently provided a helpful primer on BDC stocks.

As Andy and others have noted, BDCs offer divided yields ranging from good to great. Those high yields also appear sustainable, thanks to the diversified investment approach that these BDCs pursue. As Andy noted, "BDCs offer a surprisingly safe way to invest in high-risk areas on the cutting edge."

While Andy and others focus on some of the top stock picks in this industry, I like to reduce risk even further by taking a "fund of funds" approach. These BDCs already individually own dozens of companies, and the exchange-traded funds (ETFs) that focus on BDCs, by proxy, own hundreds of portfolio companies through their holdings.

Which BDC ETF appeals most to you is a matter of style. Here's a look at four of them.

1. Market Vectors BDC Income ETF (NYSE: BIZD) -- 7.4% yield
Launched in February, this fund seeks to own the largest BDCs, with each holding given a weighted position (and rebalanced) according to its market value. For example, both American Capital (Nasdaq: ACAS) and Ares Capital (Nasdaq: ARCC) each account for roughly 14% of the fund, as they are the largest BDCs around. (Prospect Capital (Nasdaq: PSEC), Apollo Investment (Nasdaq: AINV), and Fifth Street Finance (Nasdaq: FSC) round out the top five.)

The 30-day SEC yield for this fund is a solid 7.4%, yet investors may be thrown by the fact that this ETF appears to sport a 7.7% expense ratio. That's actually what the BDCs themselves charge, on average, in terms of management fees; it's not a fee charged by this ETF. The actual expense ratio is a more reasonable 0.4%.

2. ProShares Global Listed Private Equity ETF (NYSE: PEX) -- 4.6% yield
While BDCs are primarily a solely domestic entity, thanks to U.S. investment laws that created the BDC regulatory framework, foreign firms take a similar approach, though are often classified simply as private-equity firms rather than BDCs. This fund tries to capture the global players, with 55% of the ETF's portfolio invested in U.S.-based BDCs and the other 45% in foreign private-equity firms.

This global approach carries a clear drawback. Private-equity firms are not required to pay monthly or quarterly dividends, as the BDCs are. As a result, they are more suited to capital appreciation than income streams, which explains why this fund carries a niche-low 4.6% yield. Still, this ETF is likely to generate stronger share price gains than its peers, thanks to that private-equity weighting.

3. UBS E-TRACS Wells Fargo BDC ETN (NYSE: BDCS) -- 9.8% yield
4. UBS E-TRACS 2x BDC Index ETN (NYSE: BDCL) -- 18% yield

UBS is a virtual old hand in this niche, having launched a pair of ETNs (exchange-traded notes, which are slightly different than ETFs) back in early 2011. Each note is based on the Wells Fargo BDC index, which is a market-weighted basket of all publicly traded BDCs in the U.S. That index surged 33% last year, highlighting the increasing appeal of the BDC approach. Despite those gains, the UBS E-TRACS Wells Fargo BDC ETN sports an impressive 9.8% dividend yield.

Investors can take that further by investing in the UBS E-TRACS 2x BDC Index ETN, which is like the BDC ETN, but on steroids. UBS' fund managers borrow money at very low interest rates and then reinvest the proceeds back into BDCs, magnifying the payouts. As a result, the dividend yield is a stunning 18%.

Does such a high yield imply that this dividend will soon be cut? Not necessarily. As long as borrowing costs remain low (the one-year LIBOR currently stands at 0.7%), then the use of leverage will pay off handsomely.

Even when LIBOR moves back up toward the 4% mark, the cost of capital will still be low enough to help support double-digit yields. The real risk here is a recession, which has proven to be a tough economic environment for BDCs as they become harder pressed to squeeze dividend payments out of their portfolio companies.

Risks to Consider: That last comment on the leveraged BDC ETN applies to all BDC-related investments. Indeed this asset class fared very poorly in 2008, as industry leader American Capital plunged on fears of a liquidity crisis.

Action to Take --> The BDCs rebounded from the 2008 crisis quite nicely, and as long as the U.S. economy remains on solid footing, they should continue to generate robust yields. These ETFs (and ETNs) help to capture those yields while reducing risk even further, thanks to their diversified approach.

-- David Sterman

P.S. -- What do Mitt Romney, Bill Clinton and U2's Bono all have in common? They've all made a fortune by using this secret investing method only reserved for the wealthiest of America's elite. But thanks to a recent development, a little-known "back door" has been opened to regular investors like you and me. Go here to learn more.

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
These High-Yield Funds Make A Great Investment Even Better

Forget Stocks Or Bonds: These 'Hybrid Investments' Yield Up To 7%

Carla Pasternak — Wed, 22 May 2013 10:30:00 -0500

How high can stocks go? Since breaking through a record closing high on March 5, the Dow Jones industrial average has continued to post fresh highs. The broader S&P 500 index has more recently done the same.

Those were heady times back in October 2007 when both the Dow and S&P 500 closed at all-time highs.

But what happened only two short months later is still fresh in our collective memory. The Great Recession officially began in December 2007.

Nine months after that, in September 2008, Lehman Brothers declared bankruptcy, and lending seized up around the globe.

Investors panicked, stock prices plummeted, and by March 9, 2009, the Dow and S&P 500 had lost more than 50% each.

We're not likely to see a correction of this magnitude again. This time around, the U.S. economy is improving and companies are awash in cash. Stocks are still reasonably valued, with the S&P 500 carrying a forward P/E (price-to-earning) ratio of 14, based on estimated earnings of $112.50, only slightly above the five-year average of 12.9, according to FactSet.

But the big push behind stock prices is the Federal Reserve's low interest rate policy, which encourages corporations to fund growth and investors to take risks in search of higher yields. When the proverbial "punch bowl" of Fed cash flowing around the economy eventually gets taken away, stock prices could deflate.

Stocks aren't the only assets that will be affected when interest rates start to rise as monetary policy tightens.

Right now, corporate bond prices are at record levels as investors chase higher yields. And as the money has moved in, bond yields (which move inversely to prices) have been driven down to record lows. Even junk bond yields have dropped below 5%, a far cry from the 22.7% peak in 2008, according to Bank of America Merrill Lynch data.

As interest rates go up, bond prices will go down in order to bring the yield on existing bonds in line with the higher yields on new bonds. If the Fed's easy-money policy spurs inflation, the fixed-income payments could also lose value. At the same time, with unemployment rates still above where the Fed would like them, a low-interest environment may stay a while longer -- meaning you could continue to enjoy the steady, predictable payments that bonds and preferred shares provide for some time without getting burned.

Put simply, both stock and bond investors face plenty of future uncertainty, but also reasons for optimism.

So which makes a better investment right now -- stocks or bonds?

Stocks could keep moving up, but they could also be ripe for a correction. Bonds provide steady income, but the bond market could burst if rates were to suddenly move higher.

Luckily, you don't have to make this either/or decision.

Say hello to convertible preferred shares, or "convertibles." They are the perfect security for an uncertain market. They provide the reliable income of bonds but track the upside of stocks through a conversion feature.

What you need to ask when hunting for the best convertibles are two key questions: What's the conversion premium or discount? And what's the payback period?

The conversion premium is the difference between the conversion value of the convertible and its current price. Typically, convertibles sell at a premium because they provide higher payouts than the common stock. But the lower the premium, the better.

The payback period is the time it takes to recoup the conversion premium and break even on your investment in the convertibles compared with simply buying the common stock. Again, the shorter the better.

When I search for convertibles, I look for a short payback period (of less than five years). I also look for a current yield of at least 4.5% and a call date at least two years out so as to provide time to enjoy the superior income and allow the common shares to rise before converting.

As a final measure of quality, I make sure that the underlying common stock had a positive price trend at least over the past six months, to make the conversion feature more attractive.

These are stringent criteria in today's euphoric markets, but in a past issue of High-Yield Investing I did manage to find half a dozen convertibles worthy of further research.

One that I found particularly interesting is the convertible issue from Beazer (NYSE: BZH), which is a top-10 U.S. builder of single- and multi-family homes.

I did a complete analysis of Beazer Homes 7.50% (NYSE: BZT) convertible issues in the January 2013 issue of my High-Yield Investing newsletter. In the nearly six months since I showcased them, the price has gained a healthy 33%, all while throwing off yields well above 7% for those who purchased them in January.

Even if you didn't invest back then, at a recent price of $34.45, the Beazer convertibles pay a $1.875 annual distribution, which still gives them a current yield of 5.4%.

By comparison, Beazer's common stock doesn't pay a dime in dividends.

Action to Take --> One thing to remember is that the conversion feature on these securities could be worthless if the common shares lose value. Still, unless the company runs into trouble, interest payments and gains on the convertibles should continue to provide solid growth and income.

-- Carla Pasternak

P.S. -- In an uncertain bond and stock market environment, it's never been more important to find quality high-yield investments. In my latest research, after screening through thousands of stocks, I've found 10 high-yield stocks that have been scrutinized for safety and deliver yields up to 14.5%. To learn more about these stocks and gain access to my other high-yield investment opportunities, click here.

Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Carla Pasternak
Forget Stocks Or Bonds: These 'Hybrid Investments' Yield Up To 7%

The Rally In These Stocks Is Almost Over -- Get Out Before It's Too Late

James Brumley — Wed, 22 May 2013 09:00:00 -0500

For true long-term investors, the intended holding period for a stock is typically measured in years, and the decision to buy it is based solely on that company's long-term prospects.

But every now and then, a short-term factor takes hold and forces an investor to become a trader. Refusing to take on that role, even if only temporarily, can mean missed opportunities.

Like it or not, anybody who's currently holding a position in Kellogg (NYSE: K), General Mills (NYSE: GIS), or Flowers Foods (NYSE: FLO) is a trader. How so?

Because these food stocks and their peers have rallied considerably since the latter part of last year -- so much so, in fact, that they're all at considerable risk of a pullback. Shareholders will have to make a decision soon, too, since the underlying reason for the rally is already starting to unwind.

Cause/Effect
If you're looking for the reason these cereal and bread producers saw their stocks rally an average of nearly 40% in less than a year, you don't have to look any further than an intermediate-term price chart of wheat.

After soaring from $6.13 per bushel to a peak of $9.44 (a 54% spike) in a five-week span last summer, shareholders were understandably nervous. After all, if grain costs spin out of control, it eats into profit margins for those companies that need them to remain in business.

Wheat prices -- and all grain prices, for that matter -- didn't continue to skyrocket. Instead, investors were relieved to see wheat prices slide to a low of $6.59 per bushel by April. Relieved investors celebrated by taking on stakes in General Mills, Kellogg and other names in the cereal and bread industry.

There's just one problem with the reasoning. If wheat and other grains behave now as they have for the past several years, wheat prices are apt to rise in the very near future. In fact, wheat prices may have already begun that rebound.

Red Flags Are Waving
Wheat prices are notoriously volatile -- but not entirely unpredictable. Since 2010, the two slow pullbacks have each been followed by sharp surges. Tracing the lows from those prior bottoms just happens to line up with the low we saw from wheat prices just six weeks ago.

Although wheat and other grains have yet to spike as they did in the middle of last year and also in 2010, if the pattern and support line are any clue, such a move is around the corner.

Even if wheat doesn't soar, it's still clear there's little downside left to dole out. Therefore, there's little foreseeable upside left for these stocks.

It's not even the matter of a trend merely coming to a close, however.

Although grain prices have admittedly fallen quite a bit since July of last year, stocks of wheat-using companies are now well into all-time high territory. The market for some reason has become euphoric about the benefits of cheap wheat this time around, pushing them to alarmingly high price-to-earning (P/E) ratio levels.

For example, shares of Flower Foods are trading at 33.2 times their trailing income. That's the loftiest valuation we've seen in years. At 24.1 times trailing earnings, Kellogg shares are as expensive as they've been in more than a decade. General Mills is priced at a more palatable P/E ratio of 18.3, but that's still the most expensive price we've seen General Mills shares reach since 2002.

And remember, margins are unlikely to widen further -- and wheat prices are already starting to perk up again.

That's what makes these stocks so vulnerable right now. Between excessive valuations and rising wheat prices, the euphoria could evaporate in an instant and send these stocks lower in a hurry.

Risks to consider: Though the impact was likely already built into grain prices by the time the announcement was made, the U.S. Agriculture Department said on Friday that we'd see the largest crop yields on wheat, corn, rice and oilseed ever on a global basis this year. Most of that overall growth was led by the 23% increase in corn output, but with all major crops expected to show higher production, pressure was put on wheat and other grain prices.

Action to take --> None of this is to suggest that wheat-intensive stocks like Kellogg, General Mills or Flowers Foods are poor companies. But their stocks don't accurately reflect their current underlying value or prospects. All three stocks, as well as most of their peers, could suffer a pullback of 20% or more, once the scales tip the other way.

-- James Brumley

P.S. -- If you've been looking to add resource stocks to your portfolio, now may be the time. The global trend for commodities is rising demand coupled with shrinking supplies. That's why we've seen soaring prices for years... and it means short-term sell-offs can be rare buying opportunities. To learn more about Scarcity & Real Wealth, which focuses solely on the market's best resource investments, visit this link.

James Brumley does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: James Brumley
The Rally In These Stocks Is Almost Over -- Get Out Before It's Too Late